Orica well-placed for capital management: CIMB

Orica’s earnings could drop 10 per cent and it would still be able to undertake capital management in coming years, according to analysts at investment bank CIMB.

The broker took a close look at Orica’s free cash flow generation in a note to clients on Thursday morning and concluded capital management was a real possibility given the company’s strong cash flow, declining capital expenditure and already low gearing.

“Our analysis suggests capital management could occur even in the face of a 10 per cent reduction in EBITDA" the analysts told clients.

“Even under a ‘scorched earth 30 per cent reduction in EBITDA scenario, ORI would remain at the middle of its target 35-45 per cent gearing range."

CIMB expects Orica to cut growth capital in the 2014-15 financial year to $130 million, from earlier forecasts of $200 million, to reflect the company’s current growth outlook.

It means free cash flow would more than double to $554 million in 2014-15 and $721.3 million the following year.

“Even after the payment of this dividend we see surplus cash generation of A$198 million in FY15F, increasing to A$358 million in FY16F and A$419 million in FY17F," the analysts said.

“This additional cash generation would lead to a reduction of gearing levels and in time may open the door to capital management."